Deemed Dividends
The Administration's proposal on ending the double tax on corporate earnings is summarized in a press release by the Treasury Department. The amount of a company's "deemed dividends", i.e. earnings that can be paid to shareholders tax-free, must be calculated according to the plan's formula to determine corporate income that has been fully taxed. Companies may then pay out all, some, or none of that amount in dividends. The amount of dividends paid and/or cost basis adjustments would be reported annually to shareholders on the IRS Form 1099.

The shareholder will also have to do some calculating. Not that this plan will definitely pass and especially the way it is written now, but if it does, the shareholder will need to:

• keep accurate and ongoing records of all cost information, including basis adjustments;
  
  
• evaluate which accounts (taxable/non-taxable) hold taxable bonds, as those coupons will still be taxed as income;
  
  
• decide what to do with dividend-paying stocks currently in IRAs, since this "tax-free" income will be taxed when the IRA is distributed to you.

Eliminating double taxation seems inevitable-eventually. It's been going on for a long while and may continue awhile longer. In the meantime there are possible ramifications, like those listed above, to start considering.

 

Linda Stewart for www.fizone.com

January 24, 2003